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Is there a trade-off between social and financial performance of public commercial banks in India? A multi-activity DEA model with shared inputs and undesirable outputs

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Abstract

Indian public commercial banks play a crucial role in the financial support for the economic development, poverty alleviation, and women's empowerment. As social banks, they have dual performance objectives of financing the vulnerable sections of society as well as providing mainstream financial services. Balancing these twin missions is the biggest challenge for these hybrid enterprises. To date, no study has been published giving evidence on whether these banks are efficient in both facets of their dual goals. For this reason, this paper adds to the literature by measuring the social and financial efficiency of a sample of 26 Indian public banks over 2011–2014 by using an innovative Multi-activity Data Envelopment Analysis (MDEA) model with shared inputs and undesirable outputs. Our study also examines whether there is a conflict or trade-off between socially responsible and for-profit banking practices. We find that Indian public banks have managed their dual mission relatively well, but on average, they have been much more efficient in social (99.4%) than conventional banking (81.9%) activity. Moreover, this study shows a significant synergy effect between social and financial performance. However, when regional differences across India are considered by comparing the social and financial efficiency scores for different degrees of economic and human development in Indian states, the significant synergy effect is only confirmed in those public banks located in less more economically developed Indian states.

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Notes

  1. India's Dalits (formerly called “untouchables”) have traditionally been at the lowest caste of Hindu social structures. The Indian caste system is rigid and hierarchical with several disabilities imposed on the bottom castes, which, for centuries, have been kept in subjugation by the higher castes.

  2. See RBI Circular (2015) for the latest instructions, classifications and targets on priority sector lending.

  3. The target for aggregate advances to the priority sector in 2017 is 40% of the adjusted net bank credit or credit equivalent amount of off-balance sheet exposure, whichever is higher for domestic banks. Foreign banks with 20 or more branches in the country must do also by April 1, 2018. For foreign banks with less than 20 branches, the overall target is fixed at 32%.

  4. See Andersen and Petersen (1993) and Banker and Gifford (1988) for more details.

  5. The RBI states that an asset is considered as “non-performing” if interest and/or instalment of principal has remained “past due” or unpaid for more than 90 days. In this regard, banks are required to classify their assets into four main categories: Standard Assets, Sub-standard Assets, Doubtful Assets and Loss Assets.

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Acknowledgement

A previous version of this paper was accepted to present at the 2016 Asian Development Bank Institute Workshop “Developing Credit Databases and Credit Scoring for Micro, Small, and Medium-Sized Enterprises and Promoting Start-Up Businesses”. The authors would like to thank two anonymous referees, the Managing Editor and Michael Skully for their helpful comments. The first author is thankful to the International Development Research Centre (IDRC) for financial assistance. Any remaining errors are solely the responsibility of the authors.

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Authors and Affiliations

  1. Indira Gandhi Institute of Development Research, General Arun Kumar Vaidya Marg, Goregaon (E), Mumbai, 400065, India

    Mahinda Wijesiri

  2. Faculty of Economics and Business Administration, University of León, Campus de Vegazana, s/n, 24071, León, Spain

    Almudena Martínez-Campillo

  3. COPPEAD Graduate Business School, Federal University of Rio de Janeiro, Rua Pascoal Lemme, 355 - Cidade Universitária, Rio De Janeiro, 21941-918, Brazil

    Peter Wanke

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  1. Mahinda Wijesiri
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Correspondence to Mahinda Wijesiri.

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Wijesiri, M., Martínez-Campillo, A. & Wanke, P. Is there a trade-off between social and financial performance of public commercial banks in India? A multi-activity DEA model with shared inputs and undesirable outputs. Rev Manag Sci 13, 417–442 (2019). https://doi.org/10.1007/s11846-017-0255-y

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